4 When A Private Equity Fund Makes An Acquisition A Part Of The Price Is Raised Through Debts The Use Of Debt Is Kno 1 (36.05 KiB) Viewed 27 times
4 When A Private Equity Fund Makes An Acquisition A Part Of The Price Is Raised Through Debts The Use Of Debt Is Kno 2 (33.46 KiB) Viewed 27 times
[4] When a private equity fund makes an acquisition, a part of the price is raised through debts. The use of debt is known as leverage. If in an acquisition, the leverage is 1x, it means that the acquisition price is made up of equal parts of equity and debt. At the same time, the acquisition price is usually determined as a multiple of the target company's current EBITDA, which is known as acquisition multiple. Based on the following chart: Leverage Multiple vs Acquisition Multiple 10 9 8 7 6 5 4 3 2 1 0 Period 1 Period 2 Leverage Multiple Acquisition Multiple
During Period 1, the average leverage multiple was 4.5x, and the acquisition multiple 5.8x. The corresponding multiples in Period 2 were 6.7x and 8.7x, respectively. (a) Please give 1 major reason that private equity acquisitions have to be leveraged? (b) What are the average percentages of debt used in private equity acquisitions in Period 1 and Period 2? (c) What does the increase of the acquisition multiple from 5.8x of the EBITDA to 8.7x of the EBITDA tell you? Do you think this increase had something to do with the many private equity acquisitions made in Period 2 that subsequently went busted or had to be re-negotiated with the lenders? Please substantiate your opinion.
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